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Federal Judge in New York puts a halt to a foreclosure action in New Jersey

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This week, Federal Bankruptcy Judge Robert Grossman issued an order declaring a foreclosure action commenced in another state against a debtor and his wholly owned corporation void. This order supersedes a decision in a New Jersey foreclosure case where the creditor was permitted to move forward with their case in the face of violations of Federal law and New Jersey statutes that prohibit a foreign unregistered corporation from commencing and maintaining a lawsuit.

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The language in the order was clear and unequivocal; Judge Grossman’s order stated: ‘ORDERED, that the creditor’s commencement of the foreclosure action in the Superior Court of New Jersey, Chancery Division of Hudson County under Docket No. F-045436-13 is declared void; and it is further ORDERED, that the creditor, Prime Properties USA 2011, LLC is hereby directed to discontinue the state court foreclosure action commenced in the Superior Court of New Jersey, Chancery Division of Hudson County under Docket No. F-045436-13, within 10 days of the issuance of this order.

The Judges order makes it clear that any action taken against a debtor or property of the bankruptcy estate after the filing of a bankruptcy petition is quite simply void ab intio, which is a Latin term meaning ‘to be treated as invalid from the outset’.

On Friday April 25, 2014, Brian McCaffrey the attorney who argued for the debtor and ultimately won the day explained that ‘Bankruptcy law institutes an automatic stay upon the filing of a bankruptcy petition, however the legal question in this case went deeper because the creditor named the debtor and the debtor’s wholly owned corporation. While it was clear from the outset that the case as far as the debtor was concerned was absolutely a violation of the stay, whether or not the Judge would rule that the entire action was void was the question.

The foreclosure litigation in New Jersey was handled by the Law Office of James Grace who I interviewed on Friday April 25, 2014 by phone. In a motion to dismiss that case Grace pointed out that the company bringing the foreclosure had not registered and did not exist under the laws in New Jersey. Mr. Grace was surprised when the Judge, the Honorable Hector R. Velasquez, in that case failed to recognize the obvious and allowed the case commenced by a non-existent entity to continue. The law is clear, section 14A:13-11(1) of New Jersey’s Business Corporation Act provides that ‘No foreign corporation transacting business in this State without a certificate of authority shall maintain any action … [in] this State, until such corporation shall have obtained a certificate of authority.’ The Plaintiff in the New Jersey case is a New York Corporation with no certificate of authority in New Jersey. We believed it was a slam dunk, but Judge Velasquez seemingly ignored the argument and dismissed the case against the debtor because of the bankruptcy and allowed the non-existent corporation to continue their lawsuit said Grace. Mr. Grace lauded the decision by Judge Grossman and said the wording of the order is clear and concise – Prime must discontinue the foreclosure case, Grace also complimented the work done by Brian McCaffrey in obtaining the decision.

Both attorneys agreed, fortunately for the Debtor, as is often the case, Judge Grossman, a Federal Judge, used a thorough grasp of the law in a well reasoned decision to determine that the action was brought in violation of the automatic stay and ordered the creditor to discontinue the action entirely.